Numbers for U.S. Inflation & Canadian Interest Rates Are in: What this Means for Crypto

Daniel Zychla

Content Marketing

Inflation in the United States continues to grow at an alarming rate, accelerating by more than forecast in the month of June. Here’s what’s come out on the news today.

 

U.S. Inflation Continues to Accelerate

For those not well-versed with the consumer price index (CPI), CPI is a broad basket of goods and services that the Bureau of Labor Statistics tracks to measure inflation. This morning it was announced that CPI rose 9.1% in the month of June, ahead of estimates which pointed to an 8.8% increase. This marks yet another month of record inflation that has not been seen in over 40 years. After the news was released, U.S. stocks and the broader crypto market fell sharply before slowly recovering as the day progressed. 

During these tumultuous times, it’s important to understand why inflation is happening and, consequently, its potential implications.

Inflation occurs when too many dollars are chasing too few goods. This is especially evident in the energy sector, where a Russia-Ukraine conflict-fueled shortage has led gas prices to rise 11.2% in June from a month earlier (up over 60% for the year).

There are two ways to help stop or slow down inflation which include increasing supply or decreasing demand. However, from the government’s perspective, it has been difficult to stimulate supply growth following the pandemic as shortages in many sectors cannot be fixed easily. Therefore, the most straightforward and apparent approach taken worldwide in 2022 has been increasing interest rates to reduce consumer demand in the hopes that prices, and thus inflation, fall.

 

Interest Rate Hikes Again in Canada 

This morning, the Bank of Canada announced a surprising rate hike from 1.5% to 2.5%. This move exceeds the 75-basis (.75%) point increase economists had forecasted and shows the desire to raise rates as quickly as possible. Given similar forecasts in the U.S. and similarities between the two countries, it is very likely that a similar rate hike will occur later this month.

 

How Inflation and Interest Rates Can Affect Crypto 

Assets like cryptocurrencies don’t always like inflation or interest rate hikes because of the adverse impact they can have on money supply and demand. Simply put, the crypto market does well during times of prosperity, high demand, and when money is easily accessible. However, as interest rates rise, consumers are less incentivized to spend money on non-necessities, which can lead to less demand for crypto overall.

A reason the crypto market may continue to perform negatively is the culmination of growing inflation and more rate hikes that are in store for the future. Accelerating inflation is a signal that interest rates are ineffective and will need to continue increasing. Once inflation slows down, the markets can sit soundly, knowing that interest rate hikes may likely be over. Until that point is reached, it will be difficult for assets like cryptocurrencies or stocks to break the trend seen in the first half of 2022. 

Having said that, it’s not all doom and gloom for crypto as the industry continues to mature despite an economic downturn. We’re seeing more talent, time and resources continue to pour into the industry, which will benefit the crypto ecosystem in a few years. 

Written by: Daniel Zychla

Writer, content marketing at Netcoins.